If you have lost your job or are running out of money then accessing your super early may be tempting, but it’s important to understand the potential risks before you take that step. Here are three reasons you may want to think twice.
The outbreak of coronavirus has seen massive numbers of workers lose their jobs around Australia. The latest figures by the Australian Bureau of Statistics show that the unemployment rate jumped to 7.1% in May – the highest it’s been since October 2001. And then there are those people who have who worked fewer than their usual hours, or no hours at all, for ‘economic reasons’.
If you fall into one of these categories and are running out of personal savings then the Federal Government’s early access to super initiative could offer a financial lifeline.
Accessing super early – the new rules
Under normal conditions, dipping into your super before retirement can only be done under strict conditions. These include compassionate grounds or financial hardship, which typically means you’ve been relying on social security benefits for at least six months.
But these are not normal times. If you’re experiencing financial stress, it’s now possible to withdraw up to $20,000 out of your super through two $10,000 payments: one before 30 June 2020, and another in the three months after 1 July 2020. The draw-downs are tax-free and the money won’t affect social security payments.
According to the Australian Prudential Regulation Authority (APRA) as at 14 June a total of $15.9 billion had been paid out to 2.1 million Aussies who had requested early access to their super.
If you’ve been laid off, the well-being of your super fund may be the least of your short-term worries. Even so, the decision to dip into your super early is something to think through carefully. It can impact your financial well-being in three key ways – potentially long after the coronavirus outbreak has run its course.
1. Less money in retirement
Canstar crunched the numbers to show how withdrawing $20,000 from your super now could impact you later on (see table). As you can see, the younger you are, the greater the potential impact.
“Members should only think about cracking open their super after they’ve taken up the extra cash support on offer from the government,” suggested Bernie Dean, Chief Executive of Industry Super Australia (ISA).
Difference early withdrawal of $20,000 can have on retirement account balance
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| Starting Age | Starting Balance | Difference |
|---|---|---|
| 25 | $20,000 | -$102,824 |
| 30 | $40,000 | -$83,699 |
| 35 | $60,000 | -$68,245 |
| 40 | $80,000 | -$55,603 |
| 45 | $95,000 | -$45,347 |
| 50 | $110,000 | -$36,940 |
Source: www.canstar.com.au – 21/05/2020. Based on a starting gross annual income of $86,237, growing 2.1% annually, per ABS Weekly Earnings and Wage Price Index, retiring at age 67. Person’s wage is assumed to have decreased by 20% for the first two years of the simulation (so they qualify for the early access scheme) after which the person’s wage returns to their original wage. Early withdrawal amount of $20,000 for Scenario 1 is applied to balance at as $10,000 withdrawal at the start of the fourth quarter of the first year and a second $10,000 withdrawn at the start of the fourth quarter of the second year. Employer contributions are presumed taxed at 15%. SG contribution amounts per Government announced rates. Investment returns assumed to be 7.90% per APRA average 10-year annualised rate of return. Net performance deducts average fees calculated at the start of each year and based on products in Canstar’s database for the person’s age as a percentage of balance (to the nearest $20,000 up to a maximum of $140,000) to account for diminishing dollar based fees as the balance increases. Average life insurance premium of $189.34 is assumed charged at the end of each year, increasing annually by 2.5%, based on products in Canstar’s database for an average balance of $80k and age of 45 years old. End balance at retirement are shown in “today’s dollars”, i.e. they have been adjusted for inflation of 2.5%. Please note all information on income, annual superannuation fees and performance returns are used for illustrations purposes only. Actual returns and the value of your investment may fall as well as rise from year to year; this example does not take such variation into account. Past performance is not a reliable indicator of future performance.
These numbers would vary based on your own situation but this gives you an idea of the potential impact. The bottom line is that taking money out of your super will mean less money in retirement unless you play catch up.
2. Your super’s investments may have taken a hit
Chances are, your super is invested in a “balanced” option, with up to 70% of your money invested in shares. This strong weighting in shares reflects the potential for equities to earn decent returns over the long term.
However, the sharemarket has taken a dive over the past few months. Even though it has improved since mid-March it has not reached its earlier highs which means you would be locking in some losses by taking out your super now.
3. You could lose your life insurance
Accessing your super early could leave you without the protection of personal insurance.
James Hunter of legal firm Slater and Gordon, warns that a lump sum withdrawal from super – combined with regular fund fees and insurance premiums – could push your account balance below $6,000.
This benchmark matters because from 1 April 2020, default cover for life insurance as well as TPD and income protection cover, could be automatically cancelled if you have less than $6,000 in your super account.
“You will need to contact your superannuation fund to ‘opt-in’ and continue being covered. If you do not contact them, you may find yourself uninsured should the worst happen – and you suffer a life-changing injury or illness,” Mr Hunter explained.
If you decide to let your insurance lapse, there are no guarantees you’ll be able to opt back in later on, even if your super savings grow above $6,000. You may need to provide medical details, and your application may be declined by the fund’s insurer.
Watch out for scammers
If you’ve sized up the situation and decided to withdraw some cash out of super, you need to apply directly to the Tax Office through the myGov portal. You can’t apply to your fund directly.
Cyber crooks are already trying to profit from the situation. The Australian Institute of Superannuation Trustees (AIST) is warning that scammers have begun targeting fund members with offers of assistance to take up the new early release measures.
“Everybody needs to be on their guard if they receive unsolicited calls about their superannuation,” said AIST CEO Eva Scheerlinck.
One of the warning signs to look for is that you’re asked to pay a fee to access your super. Ms Scheerlinck points out that when you apply for your super release through MyGov there are no fees involved and there is no need to involve a third party.
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